illustrative examples in bases of value: ivs vs. piv · 11/26/2013 · milan, 26 nov 2013 oiv...

Illustrative Examples in Bases of Value: IVS vs. PIV

Mauro Bini

2013 OIV Business Valuation International Conference

IVSC Professional Board Illustrative Examples Project

The Illustrative Examples do not form part of the IVS. The intention is to develop further chapters on other topic including, but not limited to: • Market Participants • Market • Proper Marketing • Forced Sales • Assumptions and Special Assumptions • Aggregation and Unit of Account • Highest and Best Use • Transaction Costs • Valuation Date

3 Milan, 26 Nov 2013 OIV International Conference

IVS Basis of Value

Market Value

[Fair Value IFRS]

Fair Value (IVS)

Investment Value

IVS Basis of Value


Example: Fair Value (IVS) vs Investment Value

Market Value/Fair Value (IFRS 13) Market

Value/Fair Value (IFRS 13)

Market Value/Fair

Value (IFRS 13)

Fair Value (IVS)

Investment Value Market

Value/Fair Value (IFRS 13)

Family Business

Investment Value

Specific Buyer


Fair Value (IFRS 13) vs. Market Value

Fair Value (IFRS)

Market Value

SAME ASSUMPTIONS

Hypotetical Transaction

Highest and best use

DIFFERENCES

Unit of Account Unit of Valuation

NO Blockage Factor (Premium or Discount)

Blockage Factor (Premium or Discount)

Defensive Value NO Defensive Value


Prospective Financial Information (PFI) Relationship to Synergistic and Special Value

Standalone Business

Analysis of PFI Components



Standalone Business

Incremental market participant

synergies, if any

Market Participant Synergistic Value




Standalone Business


synergies, if any

Market Participant Synergistic Value

Incremental buyer-specific synergies,

if any

Investment Value to Buyer

Special Value (could fall anywhere

in this range)


Synergistic Value


Relationship between Bases of Value in case of a business marketed for sale

Standalone Business


synergies, if any

Investment Value to Owner

Market Value / Fair Value (IFRS 13)

Incremental buyer-specific synergies,

if any

Investment Value to Buyer

Fair Value (IVS) (could fall anywhere

in this range)

Analysis of Prospective Financial Information (PFI) Components


Case of the Application of the IVS Bases of Value

A local hotel owner is considering selling his hotel property.

Market Value Highest and best use of the property is the existing use

1° Local owner engages a valuer to estimate Market Value. Valuer determines that the highest and best use of the Hotel is the existing use.



Investment Value Entity specific assumptions regarding specific benefits

2° An International hotel chain engages a valuer to estimate the Investment value. Valuer considers specific synergies






3° The owner of an adjacent beach engages a valuer to estimate the Special Value of the hotel

Special Value Increase in value due to special external synergies








Fair Value (IVS)

4° The owner of the beach and the hotel owner negotiate the transaction

Arms’ length exchange that will reflect interests of the parties

3° The owner of an adjacent beach engages a valuer to estimate the Special Value of the hotel

Special Value Increase in value due to special external synergies







Example on economic relationship between the IVS Bases of Value

A manufacturer is contemplating an acquisition of another business. The potential acquirer estimates the following value for the transaction: Target Standalone Value = 1.000 Acquirer Standalone Value = 2.000

Market Participant Specific

G&A Savings 10

Transportation savings30

Distribution channel leverage200

Product line opportunity*300 in total 300 in total

Waste reduction/productivity increase50

* a jointly enabled opportunity

Acquirer

Value of Opportunity

TargetOpportunity


Calculation of Investment Value and Synergistic Value to Specific Acquirer

Investment Value

Standalone Valuation of Target 1.000

G&A Savings 10

Transportation savings 30

Distribution channel leverage 200

Product line opportunity 300

Waste reduction/productivity increase 50

Standalone Valuation of Acquirer 2.000

Investment Value to Specific Acquirer 3.590

Investment Value to Specific Acquirer 3.590

- Standalone Valuation of Target -1.000

- Standalone Valuation of Acquirer -2.000

Synergistic Value to Acquirer 590 Synergistic Value

INVESTMENT VALUE OF COMBINED BUSINESS


Calculation of Market Value of the Target and Synergistic Value to Market Participant

Market Value of the Target

Standalone Valuation of Target 1.000

Market Parcipant Synergies

G&A Savings 10



Market Value of the Target 1.260

Market Participant Synergistic Value 260


Market Value vs. Fair Value (IVS)

Fair Value (IVS)

Supposed negotiated at this arm’s lenght transaction

a Standalone Valuation of Target 1.000

Market Parcipant Synergies

G&A Savings 10



b Market Participant Synergistic Value 260

Transportation savings 20

Product line opportunity 120

c Specific Synergistic Value 140

d = b + c Total Synergistic Value to Acquirer 400

e = a + c Fair Value (IVS) 1.400

f = a + b Market Value 1.260


Different valuation conclusion in relation of different sets of elements…

Asset Attributes

Owner/ Operator

Assumptions

Cash-flows And Risk

Valuation of asset reflecting a particular

basis of value

OIV ED PIV.01.2013: Conceptual Framework

Exposure Draft: Conceptual Framework for Italian Valuation Standards (PIV)

20

Market Value

Intrinsic or Fundamental Value

Investment Value

OIV Basis of Value

Milan, 22 Oct 2012 OIV International Conference

PIV Framework: Basis of Value

Fair Value

Market Value

Fair Value (IVS)

Investment Value

IVS Basis of Value

21

Market Value


Investment Value

Basis of Value


PIV Framework: Basis of Value profile

Fair Value

Subject

Any holdings

Entity

Specific holding

Between two specific holdings N

UM

BE

R O

F S

UB

JE

CT

S

IMP

LIC

IT I

N V

AL

UA

TIO

N

Every participant in the market

Two holdings

The specific buyer /current owner/potential buyer

One

22 Milan, 22 Oct 2012 OIV International Conference

Type

Price

Value

Value

Price

DE

GR

EE

OF

OB

JE

CT

IVIT

Y I

N

VA

LU

AT

ION

IN

PU

TS

Low

High Market Value


Investment Value

Basis of Value

Fair Value

Subject

Any holdings

Entity

Specific holding

Between two specific holdings




Banca CARIGE S.p.A.

Banca Popolare dell'Emilia Romagna S.C.A.R.L.

Banca Popolare dell'Etruria e del Lazio S.C.A.R.L.Banca Popolare di Milano

S.C.A.R.L.

Banco Popolare Societa Cooperativa SCRL

Credito Emiliano S.p.A.

Credito Valtellinese SCARL

Intesa Sanpaolo S.p.A.

UniCredit S.p.A.

Unione di Banche Italiane SCpA

Prezzo di Borsa = 1 x DDM con Excess Capital per Azione 2014 + 0,0521R² = 94,92%

-

1,00

2,00

3,00

4,00

5,00

6,00

- 1,00 2,00 3,00 4,00 5,00 6,00

Pre

zz

o d

i B

ors

a

Valore Implicito per Azione in un DDM con Excess Capital e Risultati al 201

Pri

ce

Value (DDM with excess capital)

Price = 1x Value + 0,0521

R2= 94,9%


Perspective

Holders perspective

Standalone

Holder perspective

Equitative holder perspective

NU

MB

ER

OF

PE

RS

PE

CT

IVE

S

CO

NS

IDE

RE

D

One

Any

Two

One

Market Value


Investment Value

Basis of Value

Fair Value

Subject

Any holdings

Entity

Specific holding

Between two specific holdings

Type

Price

Value

Value

Price


25

Market Value


Investment Value

Basis of Value


PIV Framework: Basis of Value attributes

Fair Value

Effective Value

It considers only financial effects that are already reflected in current financial performance or deriving from actions that have already been put in place.

26

Market Value


Investment Value

Basis of Value



Fair Value

Effective Value Potential Value


It considers also planned actions that have not yet been started and

potential investments opportunities

27

Market Value


Investment Value

Basis of Value



Fair Value


Objective Value




It is referred to a value that could be recognized by any market participant

28

Market Value


Investment Value

Basis of Value



Fair Value


Objective Value Subjective Value




It is referred to a value that could be recognized by any market participant

It is referred to a value determined using special assumptions

Conclusion: what we want to take home

The standard setters’ (international and national) expected benefits by a more precise definition of

basis of value

The benefits will be:

1. Avoid confusion;

2. Reduce errors ;

3. Avoid «cherry picking»;

4. Reconciliate the different basis of value.

Milan, 22 Oct 2012 OIV International Conference 30

illustrative examples in bases of value: ivs vs. piv · 11/26/2013 · milan, 26 nov 2013 oiv...

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